CVAs trending down amid rising number of insolvencies

04 September 2019 3 min. read
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Volatile trading conditions, business uncertainty, and trading models in need of change are all putting huge pressure on companies’ abilities to survive. For many, the subsequent result of these challenges has been a Company Voluntary Arrangement (CVA), which gives directors some breathing space and the means to redefine and reshape their businesses to better survive in the future.

However, the latest insolvency figures show that the popularity of CVAs as a solution is on a downward trend, with the decline in CVAs increasing to 5.6% for the first half of 2019 compared with last year, whilst the number of companies entering administration has increased by 21% for the same period.

So why the decline? Part of the reason is down to their effectiveness as a tool. Many firms have seen them as a total solution to their problems, rather than as one of the tools in their toolbox to fix a struggling company.

As a result, some companies have arrived late to the CVA process, which has caused their financial position to be even weaker for investment post-CVA. For others, management’s reluctance to make initial cuts deep enough has meant that the CVA simply hasn’t brought about the radical change the business has needed in order to survive longer term.

Is it the beginning of the end for CVAs?

But the market has seen all this before, of course. In the retail sector, for example, many businesses have already gone through the CVA process, using it as a tool to trim rents and store portfolios to compete with the pressures of the shift to online spending.

However, where cuts haven’t been ruthless enough, further CVAs have followed. Select, for example, is currently undergoing its second CVA in 12 months. The problem here is that the repeated use of the CVA tool can lead to a loss of confidence in their effectiveness, by both suppliers and landlords who need to ensure the figures for their own businesses stack up, too.

CVAs not an ultimate solution

That certainly doesn’t mean CVAs are going to disappear, though; they will always have a role to play, but they shouldn’t be seen as the ultimate solution either. Instead, firms should concentrate on their core business earlier to ensure a CVA isn’t an option they arrive at too late and, ultimately, that it’s a process they can avoid completely.

For retailers, this means a return to grassroots retail and a greater focus on the longer-term picture, rather than the short-term goals that sponsored retailers are often encouraged to deliver. For landlords, it means an appreciation of the pressure that retailers are currently facing, and also a commitment to closer collaboration, so that they can be nimbler with their leases and thus provide the flexibility the market needs.

Most importantly, businesses need to recognise the early signs that they are in trouble and act on them straight away. Now isn’t the time for sticking heads in the sand, but rather taking pre-emptive early action when businesses are struggling, allowing the company to retain its value, identity and, hopefully, a successful future.

An article by Ian Brown, a managing director at Livingstone, an independent global M&A and debt advisory firm. Ian leads the firm’s Special Situations team in London which focuses on the more challenging end of mid-market M&A and refinancing.